The Bank of Japan cut interest rates six times between 1986 and early 1987 and all that new money caused the Japanese economy to bubble over…
The prolonged period of low interest rates created one of the largest domestic bubbles in the world. For a brief moment in 1990, the Japanese stock market was bigger than the US market. The Nikkei-225 reached a peak of 38,916 in December of 1989 with a price-earnings ratio of around 80 times. At the bubble’s height, the capitalized value of the Tokyo Stock Exchange stood at 42 percent of the entire world’s stock-market value and Japanese real estate accounted for half the value of all land on earth, while only representing less than 3 percent of the total area. In 1989 all of Japan’s real estate was valued at US$24 trillion which was four times the value of all real estate in the United States, despite Japan having just half the population and 60 percent of US GDP…
After the bubble popped in Japan, that government pursued a relentless Keynesian course of fiscal pump priming and loose fiscal policy with the result being a Japan that went from having the healthiest fiscal position of any OECD country in 1990 to annual deficits of 6 to 7 percent of GDP and a gross public debt that is now 227 percent of GDP…
Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, “Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession,” with Japan’s nominal GDP growth rate below zero for most of the five years after 1997.
After five years in an economic wilderness, the Bank of Japan switched, during the spring of 2001, to a policy of quantitative easing — targeting the growth of the money supply instead of nominal interest rates — in order to engineer a rebound in demand growth.
The move by the Bank of Japan to quantitative easing and the large increase in liquidity that followed stopped the fall in land prices by 2003. The Bank of Japan held interest rates at zero until early 2007, when it boosted its discount rate back to 0.5 percent in two steps by midyear. But the BoJ quickly reverted back to its zero interest rate policy.
In August of 2008, the Japanese government unveiled an ¥11.5 trillion stimulus. The package, which included ¥1.8 trillion in new spending and nearly ¥10 trillion in government loans and credit guarantees, was in response to news that the Japanese economy in July suffered its biggest contraction in seven years and inflation had topped 2 percent for the first time in a decade.
Newswire reports said the new measures would include assistance to the agriculture sector, support for part-time workers to find better employment, and rebates on toll roads. Additional spending was also to flow to healthcare, housing, education, and environmental technology.
Just this past April, the Japanese government announced another ¥10 trillion stimulus program. This was after Japan’s economy shrank by a record 15.2 percent annual rate in the first quarter of 2009. This drop was on the heels of a 14.4 percent drop in the fourth quarter of 2008.
Last month, Reuters reported that the Bank of Japan reinforced its commitment to maintaining very low interest rates and may provide even further easing. “The bank said that it would not tolerate zero inflation or falling prices.” The bank left its policy rate at .1 percent and analysts see the rate staying low possibly until 2012.
According to Reuters, the Japanese government “is fretting over the risk of the economy flipping back into recession and is pushing the bank for action.” Economy flipping back into recession? Are they kidding? Japan’s GDP at the end of this year will be no higher than it was in 1992–17 lost years…
Nobel laureate and New York Times columnist Paul Krugman, for one, points to Japan’s fiscal stimulus packages as having “probably prevented a weak economy from plunging into an actual depression.”
But the Nobel laureate’s crystal ball seems to be getting cloudy. He told the Guardian newspaper
What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn’t enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough. We’ve hit that lower bound the same as they did. Now, everything after that is more or less speculation.
When pressed, Krugman said he believed that there were two economic stories taking place in the world: the Japan story, where central banks can’t cut interest rates any more to promote economic growth, and the Argentina story, “where everything falls apart because of balance sheet problems.”
Krugman said he sees
The “Nipponisation” of the world economy with a bunch of “Argentinafications” playing a role in the acute crisis. But even after those are over, we have the Nipponisation of the world economy. And that’s really something.
Well that is really something. What Krugman the Keynesian is saying is that the entire world will suffer from a lack of aggregate demand, punctuated with the occasional financial crisis. But as Ben Powell points out, Japan’s problem is not a lack of aggregate demand “but a structure of production that does not meet consumer’s particular needs.”…
And you may have noticed that energy, healthcare, education, infrastructure, and environmental technology are where Keynesians want stimulus money spent on whether they are American Keynesians or the Japanese variety.
“Producing things that nobody wants and propping up malinvestments cannot possibly help any economy,” writes Powell.
This policy is equivalent to the old Keynesian depression nostrum of paying people to dig holes and fill them. Neither policy will revive the economy because neither forces businesses to realign their structures of production to match consumer demands…
Murray Rothbard explained in America’s Great Depression that in an economic downturn the positive thing that government can do is “drastically lower its relative role in the economy, slashing its own expenditures and taxes, particularly taxes that interfere with saving and investment.” The reduction of the tax-and-spending level will automatically increase saving and investment, “thus greatly lowering the time required for returning to a prosperous economy.”…
As Herbener explains,
when the government attempts to prevent liquidation with bailouts, socialization, fiscal expenditures, reflation and like policies, as in Japan in the 1990s and America in the 1930s, then the depression will linger. If Japan [or now America] expects to restore prosperity for the long term, central-bank monetary inflation and credit expansion, whether justified on Monetarist or Keynesian grounds, must be repudiated.
